ETF Deathwatch January 2009

The number of ETFs on Deathwatch continues to grow as we enter 2009. My current list contains 139 names: 97 ETFs and 42 ETNs. The list includes any ETF/ETN that is at least six months old and had an Average Daily Value Traded of less than $100,000 in December.

Exchange Trade Notes are suffering from concerns of default risk. The Lehman Brothers bankruptcy, which resulted in the demise of three ETNs, is causing investors to hesitate before throwing money into these products. Unless ETN sponsors to take steps to calm investor fears, their representation on the list is likely to grow in the coming months.

NETS PSI 20 Index Fund (LIS) tops the list for the second month in a row. It is an ETF designed to track the performance of the PSI 20 Index of Lisbon, Portugal. Total volume for the month of December was 900 shares. Although this represents a huge percentage increase from the 211 shares traded in November, it wasn’t enough to improve the fund’s ranking.

NETS has 15 ETFs that track single-country stock exchanges. Unfortunately, 12 of them are on deathwatch today, and the other three just barely escaped. In most cases, these are unique and potentially great products. However, investors don’t seem to know they exist. If they are to have a chance at surviving, NETS needs to step up their marketing efforts.

The SPA MarketGrader products are in huge trouble. They have a total of six ETFs and all six of them are on deathwatch. Once again, these are potentially good products, but marketing efforts have failed to attract any attention.

ETRACS is another group in dire straits with nine of their ten products on the list this month. ETRACS also has to overcome ETN credit concerns since all ten of their offerings are ETNs. The Elements offerings are in a similar situation. All their products are ETNs also, and ten are on deathwatch this month.

XShares continues to struggle. They shut down all 26 of their HealthShares and Adelante Real Estate Shares in 2008. The have four remaining products under the TDAX brand, three of which are on our list. Claymore also saw a large number of ETF closures in 2008 yet has another 19 on the list this month.

The reason for so many products being on the list is simple – too many arrived too quickly for the market to absorb. For the most part, these products are not suffering from poor design; they are suffering from investor overload and marketing failures. There will be a day in the future when 1,000 ETFs are not enough. For now, 800 is proving to be far too many. There will be further casualties.

Note: The dubious distinction of being included on the list below is reserved for U.S. listed ETFs and ETNs that have been available for at least six months, and their Average Daily Value Traded (ADVT) for the most recent calendar month was less than $100,000 per day.

What is the actual impact to investors when an ETF “dies? when an ETN “dies”?

Are the underlying holdings unwound and the invstors simply paid out their pro-rata –potentially at a loss for longer-term holders given current market conditions?

-MC

Ron Rowland on
January 7th, 2009 5:09 pm

The impact to the investor is essentially a forced sale. Most of the closings to date have been pre-announced by about a month, giving investors time to sell in the open market, assuming they got the message. Of course, the holders of the three Lehman-backed ETNs received no such warning.

If an ETF/ETN you own announces an impending closure, then I recommend you sell it in the open market (use a limit order) and not go through the hassle of being involved in the actual liquidation process.

Don’t worry too much about current market conditions if forced to sell. If you sell at a loss, then enjoy the potential tax benefits of booking the loss, and then use to proceeds to establish a new position in something that is not on the list.

Dave Balfour on
February 3rd, 2009 8:25 am

Any chance you could list the most highly traded (safest) ETF’s?
Keep up the good work!
thebalf

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